Cache Logistics Trust - Not Out Of The Woods Yet

While rental pressure persists in the Singapore warehouse sector, management noted that the rate of decline is slowing down. The recent rights issue has removed some of investors’ concerns over its high gearing levels. Management has been actively looking for acquisitions particularly in the Australian market.

Status-quo on Schenker lease disputes.

There are no new updates on the ongoing legal proceedings at Schenker Megahub (51 Alps Avenue Singapore). Management however sounded optimistic that a potential outcome is likely by the end of the year.

To recap, Cache Logistic Trust (Cache) is in a lease dispute with C&P Land (master lessee) and Schenker (tenant) on master lease renewals for the property, which expired in Aug 2016. Under the current holding agreement, Cache is receiving rent of SGD0.77psf/month for the property – well below market rates of SGD1.10-1.40psf.

A favourable outcome could potentially remove the overhang on the stock, resulting in a re-rating of the counter.

Gearing back to moderate levels with recent rights issue.

In Sep 2017, Cache announced a rights issue to raise gross proceeds of SGD102.7m to address its high gearing levels. With the proceeds used to repay borrowings, gearing has declined to 35.7% (pre-rights: 43.6%), providing some balance sheet comfort.

Management noted that it is on an active lookout for accretive assets particularly in Australia, which typically offers longer weighted average lease expiry (WALE) and where assets are freehold in nature.

Rental pressure persists but rate of decline is slowing down.

In 3Q17, Cache signed 43,500sqf (YTD: 386,300sqf) of leases. Management noted that rent reversions are still overall negative (~-5%) but noted that the rate of decline in rental has started to slow down.

Overall, we expect warehouse rents to stabilise by 1H18, and pick-up from 2019 onwards with supply tapering amid signs of demand pickup. About 1.3% and 20.7% of leases (as a % of rental income) are due for renewal in 4Q17 and 2018 respectively.

Changes at REIT manager level offers growth potential.

Management sees upside potential from recent changes at the REIT manager level, which includes HNA group’s acquisition of CWT and the privatisation of ARA Asset management. Nonetheless, management highlighted that no concrete discussion has yet to take place.

We believe the changes would potentially enable Cache to access the huge pipeline of sponsor assets in Asia, and also increase its ability to source and close deals.

Maintain NEUTRAL with lower TP of SGD0.84.

Our FY17-18 DPU forecasts have been cut by 6% and 12% respectively to factor in the impact of the rights issue. We have also tweaked lower our COE to 8.7% (from 8.8%) and raised our terminal growth to 1% (from 0%) on the back of better growth visibility.

Key concern is a prolonged drag in the Schenker lease disputes.

Re-rating catalysts include a favourable resolution in the Schenker court case, divestment of low- yielding assets, and potential M&As among smaller industrial REITs.

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